Abstract

International accounting scandals around the world have triggered a wave of interest
and discussion on the transparency and integrity of financial statements. Prior
literature has stated that due to a variety of motivations and by using different
techniques, the management of corporations might intend to influence the figures in
financial reporting. The preferred term used in the accounting literature to describe
this issue is 'earnings management', which is a very interesting and topical issue for
researchers. Therefore, this research investigates the earnings management
phenomenon in the Libyan environment. In this research, secondary data, which was
accruals-based models, and primary data analysis, which included a questionnaire
survey combined with semi-structured interviews, were used to achieve the objectives
of this research, that are: to determine the existence and the direction of earnings
management in the Libyan context; the motivations and techniques behind that; and
the earnings management constraints, which include internal accounting standards,
corporate governance mechanism and audit quality.
The analysis of secondary data examined the existence and the direction of earnings
management in Libyan companies. Accruals-based models were applied on a sample
of state-owned and private companies. The results indicated that the majority of the
companies that engaged in earnings management by using income-increasing policies
accruals were state-owned companies. However, the majority of the companies that
engaged in earnings management by using income-decreasing policies accruals were
private companies. The above results indicated that there are linkages between the
direction of earnings management and the nature of company ownership in the Libyan
environment. Further, as regards the relationship between the direction of earnings
management and company size, the results of the state-owned companies group
indicated that company size was positively and significantly associated with
discretionary total accruals. On the other hand, the results of the private companies
group indicated that company size was negatively and significantly linked to
discretionary total accruals. The primary data analysis was used to investigate three main issues: the motivations
behind the practice of earnings management; the most frequently used techniques to
practice earnings management; and the earnings management constraints, which
include accounting standards, internal corporate governance mechanism and audit
quality. These subjects were investigated by using a questionnaire survey
administered to external auditors, financial managers and senior accountants, internal
auditors, lenders, tax officers and accounting academics. Also, a series of semistructured
interviews was combined with the questionnaire survey, which was
conducted with selected respondents to the survey. Results indicated that the main
incentives for practising earnings management in Libyan state-owned companies
were: to mitigate the threat of displacement (i.e. safeguard job position) and/or
enhance management reputation, to report profits, to increase the value of
management compensation, and to meet regulatory objectives. On the other hand, the
main incentives for the private companies were to decrease the amount of taxes and to
enhance the chance of obtaining bank loans.
Further, the results showed that manipulation of the value of inventory, improper
assets revaluation, incorrect capitalising rather than expensing of expenditures,
manipulation of accrual estimation, incorrect use of expenses on asset acquisition, and
related-party transactions were the most frequently used techniques to practice
earnings management in Libya. Finally, the results showed a consensus among
respondents on the importance of accounting standard. internal corporate governance
mechanisms, audit quality as policies to constraint earnings management in the Libya
environment.